Happy Wednesday to all! Yesterday, we got involved in an Overnight Trade of Dollar General Corp. (DG). I had set a high end of my range to enter at 25.20, and I know did not get involved because it did not hit it. Yet, for future reference and unlike my Buy and Short Sales of the Day, a few cents does not make too big of a difference on a well priced stock above $15 or $20. I did not specify that. If you did get involved around 25.25 – 25.30 though, you are sitting pretty right now. DG saw a nice 6.5% rise in profits and beat EPS estimates with a reported 0.51 vs. expected 0.43. The stock is at 26.50 currently in pre-market, which is a solid 5%+ gain for us on the trade. On our Long Play of the Week Mosaic Co. (MOS), it looks to be rebounding today. The stock is already up to 60.20 in pre-market where we bought into it. We will sell if we can get 3-5% today, otherwise continue to hold until tomorrow morning.
Now, I have a perfect play for you lined up for a 10 AM entry.
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Buy Pick of the Day: Proshares Ultra/Ultrashort Oil and Gas ETF (DIG/DUG)
Analysis: One of my favorite trades that lines up from time to time is a play surrounding the crude inventories. Currently, oil is trading around that lovely $83 level and has bounced back from a small decline over the past couple days. Oil is hitting prices, though, it has not been at in a couple years. I think it is in a crucial spot right now to really take off and test new highs up to $85 and set a new range or decline back down over the coming days. There are a lot of factors that go into that movement, but one of the main catalysts of oil prices is the weekly crude oil inventory reports.
Last week, crude oil inventories added 7.3 million barrels, which helped to bring the price down of oil throughout the rest of the week. Prices have bounced back, but another addition to that number this week would we assume have a similar effect. A decline, though, would probably be a catalyst to push things even higher. Since we know that oil does not really run on fundamentals, the inventories work as emotional catalysts more than anything. Leading into them today, it appears that speculators are looking for a decline as prices have moved up.
Now, how can we turn the oil market into a trade. DIG and DUG are in the same position as oil. DIG and DUG are both extremely neutral currently. DIG has started to pick up ground over the past couple days as oil prices have risen, while DUG has given up gains that it saw from when oil dropped. Both, however, are in a position to rise and fall much more. If the prices did really start to drop again, DUG could have a pretty phenomenal turn around and be even more volatile especially since it is down going into today. Yet, DIG has a lot of room to the top of its bollinger band range and should test it if we see a .png)
negative inventory level.
The way to play this is to set up both trades for 10 AM on two screens. We watch the inventory reports at 10 AM. If the report comes out positive, meaning that crude oil inventories rose, we want to pull the trigger on DUG. If inventories were negative, meaning that inventories left over from previous weeks had to be used because of greater demand than expected, then we want to buy DIG. This has to be done very quickly and right at 10 AM, but it will be a great trade.
Good luck!
Entry: We are looking to enter DIG or DUG at 10 AM based on the announcement of crude oil levels. If crude inventories are positive, meaning they gained week-over-week, we want to buy DUG at 10 AM. If they are negative, we want to buy DIG.
Exit: We will be looking to gain 2-3% from our entry at 10 AM.
Good Investing,
David Ristau
